Examination of Witnesses (Questions 248
- 259)
TUESDAY 17 JUNE 2008
Professor Gordon MacKerron
Q248 Chairman:
Welcome, Professor MacKerron. Thank you for coming to give evidence
to us. What do you consider to be the key considerations for UK
energy policy (that is energy and not just electricity)? How do
you see renewables fitting into that policy?
Professor MacKerron: That is a big question;
I will endeavour to be fairly brief on it at least to start with.
I would have thought the most important single difficulty facing
energy policy is the potential trade-off between different objectives.
Clearly the two major objectives now are energy security on the
one hand (which seems particularly powerful as an objective at
the moment) and the long term climate change objectives (which,
as you know, the Government has espoused since at least 2003).
I think the difficulty is that policies designed to counteract
climate change are nearly always good for security, but policies
that are designed to be good for security are not always good
for climate change. Specifically a policy for security that emphasises
the use of coal is going to counteract objectives for climate
change in the absence, as we have already heard, of any realistic
prospect for carbon capture and storage in my opinion probably
for 15 or 20 years and that is if things go reasonably well. Perhaps
in a slightly more political context, the real difficulty Government
faces is the urgency which it and the European Union perceive
in proceeding towards rapid carbon emission cuts and acquiring
enough political legitimacy to do so. It may require some difficult
choices which voters and consumers may find quite awkward and
making policies stick while having the urgency which Government
now believes is necessary I think is a big and difficult issue
which Government will have to keep grappling with for some time.
On the subject of renewables, renewables have a number of advantages
in relation to policy objectives. In terms of the security objective
they add diversity to the system and a subject to which I might
return later if we have time is the portfolio effect of adding
renewables to a system that is predominantly fossil fuel. They
clearly substitute at some level for fossil fuels; they reduce
pressure on world fossil fuel markets to the extent that security
is an issue of dependence on oil and oil prices. There is help
in that area too. There is of course a direct effect on climate
change. You have already explored with the previous witnesses
who have more expertise than I do some of the issues about intermittency
of renewables which, in another dimension of security, may be
thought to reduce security. My own view is that we will probably
find ways of managing that relatively cheaply partly because other
countries such as Denmark are already facing and, as far as I
can judge, making reasonably good technical progress in solving
the problems. In economic terms there are two major market failures
involved in renewable energy. First of all it helps the problem
of unpriced carbon which, of course, despite the European Emissions
Trading Scheme, is not a good investment incentive at all, and
the fact that R&D will tend to be underprovided in any private
system because of its widespread availability to other parties.
Whether renewables currently are well managed in relation to these
objectives is a different question. I would differ slightly from
the previous witnesses in thinking that there are real difficulties
in terms of risk around the Renewables Obligation. In terms of
value for money feed-in tariffs appear to have strong advantages.
That is a subject you may wish to return to later, but those would
be my opening remarks on the subject.
Q249 Lord Layard:
Looking at electricity, how do the costs of generating electricity
from renewables compare in your view with fossil fuel and nuclear
generation?
Professor MacKerron: It is very easy
being an academic to say that that is a very hard question to
answer, but that is how I will start. The first issue is that
although the stand alone costs of individual technologies do matter
and of course to private companies who are going to invest their
return will very much depend upon the balance of the costs and
the return they will get on their investment but, to come back
to the point I made earlier, it is important to look at the system
impacts on investments; whether that is a nuclear investment or
a renewable or a fossil fuel investment matters a great deal.
A particular advantage of renewables is that because their risk
profile is not correlated with the risks of fossil fuel generation—so
when fossil fuels become more expensive that does not affect the
generating costs of renewables or, for that matter, nuclear—the
value to an energy system (an electricity system) of adding renewables
which are currently a small proportion of the system and where
the risks are not correlated with the fossil fuels, the value
to the system is greater than reflected in the probably much higher
stand alone costs. The difficulty in a privatised, liberalised
system is that that advantage cannot be captured by the individual
investor because it is a system property which affects consumers.
That must be set against some of the drawbacks of renewables which
you have heard about before which include a need for backup, which
again is a cost that will not be met by the renewables investor
as and when it becomes an important issue. That is important to
say. What are the costs of renewables? They are very various.
You have heard estimates for onshore and offshore wind. For other
technologies for which we have hopes but which are not yet commercial
such as tidal and wave, frankly it is really not very helpful
to put numbers unless you put a very wide range around them in
which case their value is of restricted use. When it comes to
fossil fuels it is clear that under current conditions they are
the cheapest and most commercial option, historically gas and
probably coal now if that was not subject to regulatory provision.
However, as we have also heard, oil and gas prices do vary very
substantially. To quote a single number for what is the cost of,
say, a gas fired power station built today with a lifetime perhaps
of 30 years depends entirely upon unknowable figures for the future
of gas prices, so it is very difficult to say. In terms of nuclear
there are real difficulties in prediction there as well. We have
not tried building a nuclear power station in this country for
over 20 years; we do not yet know which design we might build;
we do not know what regulatory provisions will adhere to that
design with implications of cost. Perhaps, most importantly of
all, we do not know whether or not we will build a series or a
single unit. If we were to build a series we would probably have
construction costs something like 30 per cent lower than if we
build only one. Our history, as you probably know, is that we
tend to build one at a time in the UK; that could change, but
that is our history. There are finally issues about the back-end
of the nuclear fuel cycle, about radioactive waste and de-commissioning
which probably are not very large costs, especially if you allow
a discounting over a long period into the future, but which nevertheless
worry investors a great deal. I am quoted in the Financial
Times saying that Government has offered now a fixed price
to take waste off nuclear operators' hands which may be a necessary
condition for nuclear investment but is, in my view, a subsidy
of some indeterminate kind. I do not necessarily object to subsidies
but I think it is important to recognise that it is a subsidy
rather than something that the market has provided. That is my
somewhat qualified answer, but I just do not think it is worth
pretending that we know things about the future that we do not;
that is a major difficulty for Government and for private investors.
Q250 Lord Macdonald of Tradeston:
Just picking up on your quote in the Financial Times on
the hidden subsidies, as you saw it, for new nuclear plants in
the form of fixed price for waste disposal. Do you think that
the Government should support nuclear power in a similar way to
renewables? If so, the waste disposal that you talk about, is
that where subsidy might best be focussed? How would subsidising
nuclear affect the economics of renewable generation overall?
Professor MacKerron: There is clearly
a case for subsidy of nuclear on the grounds that it is a low
carbon option and because carbon is not adequately priced there
is a case for helping nuclear power on those grounds similarly
to renewables. On the other hand I would have thought the subsidy
that nuclear, as it were, deserves in this kind of analysis is
somewhat less because nuclear has a long history of research and
development support. There is a very large and increasingly now
flourishing international industry in nuclear power and in those
circumstances I think the subsidy probably should not be so great
because renewables I think have greater and longer term prospects
because their research and development has historically been so
limited. In terms of how a subsidy might be given, it does seem
to me that waste is a very likely area because that is what investors
seem to worry about most, even if the discounted costs of waste
so far ahead are relatively low. It does seem to me that the back-end
of the nuclear fuel cycle—that is the decommissioning and
waste—is a responsibility which always in the end devolves
to governments partly because of the extreme hazard that might
be represented by the worst possible outcome but also because
of the very long time horizons. On current estimates we would
not start to dispose underground of waste from new build for about
100 years. That is because of the time it will take us to build
a repository and the fact that our legacy waste is inevitably
ahead of new build waste in the queue to be disposed; one would
not want to re-package it at very high cost. We are talking about
timescales of 100 to 150 years which we do not really have any
mechanisms for private firms to handle. In the end I think it
has to be a government responsibility and that may be seen as
a drawback of nuclear power but I think it is an inevitable consequence
of support for it. Finally on the subsidy issue, clearly what
investors in nuclear power also desperately want is some guarantee
of the selling price they will get for their product which will
be something like 10 to 30 years ahead. Of course present market
conditions do not provide that and although the carbon price may
be positive and large in ten to 30 years' time no private investor
will bet on it right now. I think these are questions that are
still somewhat open and Government's reluctance to admit to subsidy
I think is because if they did they would be sent off to Brussels
under state aids and we do not know quite how long it would take
before they would come back out of Brussels on that score.
Q251 Lord Paul:
How significant, in your view, is the potential for reducing carbon
emissions by placing greater emphasis on the development of carbon
capture and storage? How cost-effective, compared with the alternatives,
is carbon capture and storage? Should the government be more pro-active
in supporting its development?
Professor MacKerron: I will try to be
brief; my answers are not terribly different from those you have
already heard this afternoon. It is clearly going to take a long
time. I have recently been speaking to people who represent the
Government of India at a bureaucratic level who tell me that for
India there is no serious policy interest of any kind at all.
It is a matter of probably 20 years before it gets fully onto
the policy agenda. Of course that could be sooner, but that is
their current estimate. From a domestic perspective, carbon capture
and storage is probably more helpful in relation to gas than to
coal because it will be cheaper and gas still emits carbon dioxide.
Because of the international perspective, especially in relation
to India and China, coal is inevitably the main focus. The major
difficulty about predicting the cost is that the cost will vary
enormously depending upon the storage location and the distance
from the point at which the carbon is captured and the point where
it will finally be stored. If it is in a relatively nearby offshore
oil well and there is the possibility of enhanced oil recovery,
that part of the cost equation will be very low. If, on the other
hand, one has to find a deep saline aquifer and characterise it
and it is perhaps a couple of hundred miles from where the capture
takes place, the costs are frankly yet unknown but probably very
high. It will be an expensive technology, there is no question
about that. On present technologies you pay a significant penalty
in reducing the power output because of the power you need to
run the capture plant. That is a major objection that, for example,
the Indian Government currently has, that it will lose a great
deal of the power that it badly wants for its development effort
and capturing the carbon is of rather less interest to the Indian
Government for quite legitimate reasons at present.
Q252 Lord Griffths of Fforestfach:
How long do you think it is going to take before we see this practically
implemented in the UK?
Professor MacKerron: I would have thought
2020 would be very optimistic. We have yet to demonstrate it fully
on a commercial scale and there are questions about whether pre-combustion
or post-combustion is the right route to go down. The Government
is going for post-combustion probably because it thinks the long
term export prospects to India and China might be better served
that way. It is not clear to me that that would necessarily prove
to be economically the most viable or best way forward. I heard
on the radio the other day the Energy Minister saying that in
the current comprehensive spending review there is no money for
government support for the carbon capture and storage project
to move onto the competitive process. I have heard industry people
saying perhaps 2025 as a more or less hoped-for estimate of when
commercial application at scale might be possible. These things
are of course speculative.
Q253 Chairman:
Let me put the question in a slightly different way and that is
that if Government decided to put its shoulder to that wheel and
put the resource in, how soon could it be done?
Professor MacKerron: I think you could
then talk about 2020 as being a more realistic timeframe but there
are still significant technical uncertainties. It could go very
slightly better than that, but even with shoulder to the wheel
it might go worse than that as well. One might say 2020 would
be a reasonably optimistic timeframe.
Q254 Lord Moonie:
Do the UK's electricity trading and transmission arrangements
provide a suitable framework for an industry with a high proportion
of renewable electricity generation?
Professor MacKerron: I think the answer
broadly speaking is no but that does not mean that there is no
hope. On the subject of transmission and particularly the distribution
in local systems they were of course designed for large centralised
remote power stations, simply stepping the power down from very
high voltage down to factories, households and so on. There is
already a big and technically quite complex effort to try to change
the transportation system for electricity to allow for a much
more interactive system which can accept much smaller and more
local generation which I think most of us think is going to be
one important ingredient of any future which is more low carbon.
There are real transmission difficulties which you have heard
about already today in renewables because of course renewables
have to be sited where they have to be sited not necessarily near
centres of demand and that is an issue that takes some time to
resolve. I think it is possible that we can change our transmission
and distribution arrangements in time for the expansion that we
expect in renewable energy, but the one area which I think is
badly neglected and does need more attention is in the area of
very small scale renewable generation. There is real prospect
in the long term for micro-generation at household and block of
flats level which is, among other barriers, seriously inhibited
by the fact that we do not have any arrangements for trading or
physical distribution—reversing the flow—to give an
incentive to owners of small commercial premises, householders
or blocks of flats to engage in renewable and other forms of micro-generation.
That is an area I think that is seriously neglected and in which
Government has been extremely slow to take action despite a number
of reviews.
Q255 Lord Best:
You said blocks of flats and commercial buildings and one is perhaps
looking at quite big blocks of flats—tower blocks—and
big commercial buildings. Would you agree that efforts to micro-generate
at the level of the individual household are likely to be waste
of everybody's time, unless you live in the Scottish Highlands?
Professor MacKerron: Micro wind at household
level in urban areas is, I think, a dead duck; there is no obvious
future in it without any major technological change. Some types
of micro-generation do not work at that scale. The kind of micro-generation
more likely to work at that scale would probably involve the use
of fossil fuels but probably at very high levels of efficiency,
so very small scale combined heat and power is potentially quite
an attractive prospect and that will save a lot of carbon emissions
compared to using mains gas or central heating. I know it is not
the subject of your inquiry but in the area of micro-generation
that is much more promising than micro-wind which frankly has
not got much future at all for the great majority of householders
in a country like the UK.
Q256 Lord Griffths of Fforestfach:
Do you think it is important that we have in the UK a broad range
of technologies providing electricity and do you think the benefits
can be quantified?
Professor MacKerron: I think it is important
to have a reasonable range. It is difficult to say how many; one
cannot come to very deterministic answers. I think to return to
a point I made earlier, there are some techniques, mostly borrowed
from orthodox finance theory—mean-variance portfolio analysis—which
do suggest that where a technology has a small share and its risks
are uncorrelated with those of the dominant technology, the value
to the system as in standard portfolio analysis is actually somewhat
greater than the standalone cost. My late colleague Shimon Awerbuch
from the University of Sussex did very good work on precisely
trying to quantify the different standalone costs, what the system
advantage might be of introducing renewables and there are other
techniques being developed around valuation, diversity, trading
it off against performance in the form of standalone costs which
I would be happy to share literature with you on if that is of
interest. There are ways of doing the quantification. The more
difficult issue is how to reward the existing rather fragmented
market system for system benefits which at the moment cannot be
captured by individual investors. That is one of the reasons why
I personally think that the Government needs to intervene somewhat
more than it currently does in order to try to find ways of rewarding
genuine benefits for systems—which could apply to nuclear
technology as well as renewables—where those effects take
place.
Q257 Lord Best:
In terms of that Government intervention, you are saying more
of it is necessary. You would not say that the Government has
been very effective so far in its policies in terms of more renewable
energy. What have been the most cost-effective forms of support
in your view in the UK and in other countries? What should be
the balance between subsidies, guaranteed prices, quotas, carbon
taxes and other forms of support?
Professor MacKerron: I think one has
to confine one's attention to those instruments that seem politically
plausible. Within Europe I think carbon taxes on any significant
scale are not currently plausible and emissions trading is the
fashionable way. I do not say "fashionable" to decry
it but nevertheless, politically speaking, it is the way we are
going. In terms of specific renewables instruments the research
with which I am familiar does quite strongly suggest that well-designed
feed-in tariffs, where you differentiate the guaranteed price
you will give for individual technologies, not only elicit renewables
more rapidly but they do elicit them at a lower cost to the consumer.
There is good, reputable published research comparing, for example,
Germany and the UK, which will show that value for money is substantially
greater in the German system. Having said that, I think that the
Government has a real dilemma. Having gone for a renewables obligation
it is very sensitive to the criticism that comes from investors,
that investors want some kind of certainty in the public policy
system; they do not want Government to keep changing horses every
five years. I think there are ways around that. You can ring-fence
those people who have already invested in the renewables obligation
system; it is a little bit messy but it could be done, and I would
not like us to be trapped forever in the renewables obligations
systems when I think increasingly the evidence is that a feed-in
tariff would be more effective. However, I recognise that the
transitional problems are quite substantial and Government has
some difficulty with that.
Q258 Lord Lawson of Blaby:
This is all really totally unreal, is it not? You very correctly
pointed out that the Indians have no interest at the present time
and for the foreseeable future in making their energy more expensive
by carbon capture and storage. That is really part of a general
pattern. It is certainly the case of China and India and a number
of less important countries; their priorities are the cheapest
possible energy. That does not mean to say that they will reduce
their energy intensity through improvements in efficiency, but
they are going to keep on using carbon and producing energy and
therefore the whole thing is pie in the sky. All the money we
are spending is only to reduce global emissions, and global emissions
are not going to be reduced by this massive amount we are told
is necessary. Whether it is or not is another matter, we will
not go into that. All we can try and do is do this charade at
the least cost and that is really my question to you. If we are
going to say that we want to have a renewables policy, have a
significant part of our energy produced by renewables, the Government
has gone very heavily into wind power and, although it is not
a renewable thing, they are going in a slightly less enthusiastic
way into nuclear. How that is going to work out we shall see.
With your great knowledge of these various different forms of
electricity generation what is in your opinion the best buy of
the various renewables and by how much is it the best value? Or
are they all much of a muchness? You may include nuclear in your
answer.
Professor MacKerron: Let me start by
saying something that is a repetition of what you heard before
but I still hold that it is genuine. Renewables do bring other
benefits than simply reduced carbon emissions. In a world that
is increasingly worried about energy security renewables can be
quite helpful as both a more diverse source and a source that
reduces our dependence on fossil fuels. There are countries—but
we are not among them—that have acquired industrial policy
benefits from renewables but I am afraid the way Government has
organised its policy in that area in our country that is not the
case. Coming now to the substance of your question, what is the
sort of Which? report best buy on this subject, I think
there is no doubt that because of the way the Renewables Obligation
has worked it has sought out and concentrated on that technology
which currently has been the best buy and that is onshore wind.
Offshore wind, I believe, can become not quite as cost effective
as onshore but will become, I think, substantially cheaper. I
think we need, in cooperation with other countries—I stress
that very much—to have much more intensive research and
development efforts into other credible renewable energy technologies,
among which the marine technologies (in which, as you know, Scotland
has a particularly strong interest) do have major long term prospects,
not least because some of them do not have some of the intermittency
characteristics that wind does (in particular tidal is a possibility).
Biofuels are of course a major issue at the moment. I think there
is a certain hysteria about biofuels which suggest that they are
in almost all circumstances terrible. I do not think we have the
research base to say that, but clearly people are right to point
to some of the conflicts between food and fuel for land use and
they are unavoidable. If you want to come to nuclear, I think
we are still in a position of enormous uncertainty about nuclear.
If we repeat our past policy on nuclear which is to build the
odd reactor here and there to a different design, frankly I think
they will turn out to be very expensive. On the other hand, if
we were to go for a very large programme with Government support
we would seriously run the risk of undermining the market that
we so painstakingly built up over the last few years. There are
some difficult trade-offs there and frankly I do not think we
know in the case of nuclear where we are. The short answer is
that what we have been doing is the best option to date.
Q259 Lord Lawson of Blaby:
Let me put the question another way, but maybe the answer is the
same. Supposing the Government were to come in and say "We
are prepared to provide a subsidy of whatever it is per gigawatt
of electricity generating and we are committed to maintaining
that for a reasonable period of time" and leave it to the
market—the industry—to decide which of these various
sources of energy or electricity they would be most likely to
find investors to support, would they all go for wind power do
you think, or not, looking across the world and not just from
our own experience?
Professor MacKerron: The UK would certainly
go for wind for now because there is a reasonably well-established
cost base for wind. You heard the previous remark that the costs
of the raw materials for wind such as copper and steel have inflated
in recent years which has made wind, at least temporarily, as
well as nuclear substantially more expensive than we expected.
Nevertheless, there is a kind of certainty about wind which would
give investors some comfort. I am sure they would then wish to
explore whether or not nuclear would give them the same degree
of comfort and it is possible that over time—it would not
be immediately—they might decide that nuclear was a good
bet. If you look at other countries you get a different picture.
If you went to France you would almost certainly discover that
nuclear seemed the best bet, not especially because of the market
but because the French state has built up a huge protective subsidy
implicit and explicit around its nuclear enterprise which has
been run quite efficiently for a long time. There would be large
national differences and of course we have one of the more liberalised
markets in the world; others would not have quite that kind of
open market competition, the sort that is imaginable in the UK
but probably would not happen to the same extent elsewhere. I
suspect my answer has not been terribly different from the other
way round when you first asked me it.
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